The market is represented by the S&P 500 Index. Index returns reflect general market results and do not reflect actual portfolio returns or the experience of any investor, nor do they reflect the impact of any fees, expenses, or taxes applicable to an actual investment. The S&P 500 Index is a market-capitalization-weighted index that is generally considered representative of the U.S. stock market. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

Capitalizing on the long-running bull market

This video highlights what investors should know as we enter the bull market’s later stages.

Video Transcript

If you’re a sports fan you look forward to watching the championship game. You know how much time and effort it took for your team to get there and you want to experience the final big win too … feel that “thrill of victory.”

You might say, many investors today are like sports fans following their winning team. They may have a lot riding on the outcome of this long-running bull market. And they want to continue capitalizing on one of the longest economic expansions in history.

Since the 2007–2008 financial crisis, the U.S. equity market has climbed higher, and it’s been a while since we had a major pause. However, we believe the U.S. equity markets are entering the later phase of the bull-market run.

Now, the best time — and most difficult — to prepare for a bear market is right before the bull market ends — but, that’s difficult to predict, and unlike the championship game, a bull market doesn’t end suddenly when the clock runs out.

Of course, there will be signs to watch for, like additional volatility and a change in investment performance, but leaving the market too soon may mean missing out on late-cycle growth potential … which can be significant.

So, you may not want to leave during that last time out. There could be a come-from-behind victory you won’t want to miss — and, there’s always the possibility of overtime!

To learn more about how different asset classes perform late in a bull market and the signs that may signal the next cycle change, download our Wells Fargo Investment Institute special report: Investing Late in a Bull Market.

The S&P 500 Index is an unmanaged market capitalization-weighted index considered representative of the US stock market. It is not possible to invest directly in an index.

Risk Considerations

Each asset class has its own risks and return characteristics which should be evaluated carefully before investing. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment might achieve.

General Disclosures

The opinions expressed reflect the judgment of the speaker as of the recording date and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Four Late-Cycle Signs to Monitor

Although we have seen signs of investor complacency in 2017 and early 2018, other factors are not foretelling that a recession is likely in the near term, supporting our view that the bull market still has some room to run.

1. Widening credit spreads

Credit spreads measure the amount of increased return an investor requires for a given company’s credit risk. As the economy enters the latter stages of the cycle, business risk increases. Investors then demand more return, resulting in wider (higher) credit spreads.

U.S. credit spreads have yet to significantly widen

Sources: Bloomberg and Wells Fargo Investment Institute. For illustrative purposes only. Investment grade represented by Bloomberg Barclays U.S. Aggregate Bond Index, which is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market. High yield is represented by Bloomberg Barclays U.S. Corporate High Yield Bond Index , which measures the USD-denominated, high yield, fixed-rate corporate bond market. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Option-adjusted spread is the difference in yield over equivalent-duration Treasuries. Shaded area indicates a recession as designated by the National Bureau of Economic Research. Data as of March 31, 2018.

2. Investor complacency

Late in a long bull-market run, investors may remain calm even during bouts of volatility. Many have become accustomed to a stock market that continues to climb higher.

What we’re seeing

Earlier this year, when the S&P 500® Index experienced its first correction in a few years, many investors appeared to be taken by surprise.

We believe that investors should be on guard for further periods of volatility and maintain a diversified portfolio in line with their longer-term investment plan.

3. Rising interest rates

As the economy strengthens, the Federal Reserve (Fed) raises rates to prevent the economy from overheating and inflation from accelerating.

What we’re seeing

Currently, short-term interest rates are increasing but are not considered restrictive.

A key signal of an impending recession is when the yield curve inverts, such as when the 2-year U.S. Treasury note has a higher yield than the 10-year U.S. Treasury note. While every recession has been preceded by an inverted yield curve, not every inverted yield curve has led to a recession.

As shown here, the spread between 2-year and 10-year Treasury securities has tightened but has not yet inverted.

The yield curve has flattened but has not inverted

Sources: Bloomberg and Wells Fargo Investment Institute. Series represents the difference between the constant-maturity 10-year U.S. Treasury and the constant-maturity 2-year U.S. Treasury. For illustrative purposes only. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted. Past performance is no guarantee of future results. One basis point equals 100 basis points. Shaded area indicates a recession as designated by the National Bureau of Economic Research. Data as of March 31, 2018.

4. Potential asset bubbles

When valuations rise above historical averages, investors are buying equities at a premium price, which may result in asset bubbles.

What we’re seeing

Currently we are not seeing signs of asset bubbles, and believe that most markets are fairly valued at this time.

However, new cash tends to enter the equity market in the later stages of a bull-market run, due to investors’ fear of missing out on market gains.

Such inflows tend to drive up price levels ahead of fundamental measures, like earnings.

As the chart here shows, international markets may not be as far along in their economic and stock market cycles as the U.S.

This means that their stock markets might continue to climb even if the U.S. stock market takes a pause in the coming years.

Other developed market equities have lagged U.S. equities

Sources: Bloomberg and Wells Fargo Investment Institute, as of March 31, 2018. For illustrative purposes only. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. The S&P 500 Index is a market capitalization-weighted index considered representative of the U.S. stock market. The MSCI EAFE Index is an equity index that captures large- and mid-cap representation across developed market countries around the world, excluding the U.S. and Canada.

2. Focus on cyclical sectors

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The most lucrative sectors tend to shift

As the bull market peaks and transitions to a bear market, sector leadership typically changes.

Because inflation tends to rise near the end of a bull market, natural inflation-hedged sectors like Materials may perform well.

During a bear market, the sectors that tend to hold their value best are those that are more defensive in nature.

3. Consider active management

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Active can outperform

Our research shows that about half of all mutual funds in Morningstar Inc.’s database outperformed their benchmarks in 2017, making it the best year for active management since 2012.

Relative performance was especially strong for U.S. large-cap value, international equity, and U.S. fixed-income funds.*

We believe that a blended approach — including a mix of active and passive strategies — may be suitable for many portfolios, depending on an investor’s risk profile and return objectives.

4. Utilize additional asset classes

Diversification can counter equity volatility

Asset classes such as fixed income and alternative investments (for qualified investors) can help counter potential equity volatility.

In particular, we believe that hedge funds could benefit in 2018 from an improved environment for active management.

As shown here, since 1990, hedge funds have held up better than global equity indices in down markets, capturing just 18% of the losses equities sustained; in up markets, hedge funds have captured 53% of positive equity returns.

Hedge funds can help investors win by not losing

Up/Down Market Capture Ratios are a measure of investment performance in up and down markets relative to the market itself. A down market is one in which the index’s quarterly return is less than zero.

Sources: Morningstar Direct and Wells Fargo Investment Institute, December 1, 1990, to March 31, 2018. For illustrative purposes only. Index returns represent general market results, assume the reinvestment of dividends and other distributions, and do not reflect the impact of any fees, expenses or taxes applicable to an actual investment. Unlike most asset class indices, HFR Index returns reflect deduction for fees and expenses. Because the HFR indices are calculated based on information that is voluntarily provided actual returns may be higher or lower than those reported. An index is unmanaged and not available for direct investment. Past performance does not guarantee future results. Diversification does not guarantee investment returns or eliminate risk of loss including in a declining market.

Hedge funds are represented by the HFRI Fund Weighted Composite Index. Global equities are represented by the MSCI World Index. The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 2000 single-manager funds that report to HFR Database. Constituent funds report monthly net-of-all-fees performance in U.S. dollars and have a minimum of $50 Million under management or a 12-month track record of active performance. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of 23 developed market countries including the United States. Alternative investments, such as hedge funds, are not suitable for all investors and are open only to accredited or qualified investors within the meaning of the U.S. securities laws. Please see the end of this report for some of the risks associated with this asset class.

More Questions, Answered

The full Investing Late in a Bull Market report lets you know:

How close we think we are to the end of this equity bull market

How investors typically behave toward the end of an upcycle

How asset classes have performed late in the cycle and how performance shifts when an equity bear market occurs

Plus, you’ll find the five actions that may help you prepare for the next bear market.

Video Transcript

If you’re a sports fan you look forward to watching the championship game. You know how much time and effort it took for your team to get there and you want to experience the final big win too … feel that “thrill of victory.”

You might say, many investors today are like sports fans following their winning team. They may have a lot riding on the outcome of this long-running bull market. And they want to continue capitalizing on one of the longest economic expansions in history.

Since the 2007–2008 financial crisis, the U.S. equity market has climbed higher, and it’s been a while since we had a major pause. However, we believe the U.S. equity markets are entering the later phase of the bull-market run.

Now, the best time — and most difficult — to prepare for a bear market is right before the bull market ends — but, that’s difficult to predict, and unlike the championship game, a bull market doesn’t end suddenly when the clock runs out.

Of course, there will be signs to watch for, like additional volatility and a change in investment performance, but leaving the market too soon may mean missing out on late-cycle growth potential … which can be significant.

So, you may not want to leave during that last time out. There could be a come-from-behind victory you won’t want to miss — and, there’s always the possibility of overtime!

To learn more about how different asset classes perform late in a bull market and the signs that may signal the next cycle change, download our Wells Fargo Investment Institute special report: Investing Late in a Bull Market.

The S&P 500 Index is an unmanaged market capitalization-weighted index considered representative of the US stock market. It is not possible to invest directly in an index.

Risk Considerations

Each asset class has its own risks and return characteristics which should be evaluated carefully before investing. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment might achieve.

General Disclosures

The opinions expressed reflect the judgment of the speaker as of the recording date and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Investment Expertise and Advice to Help Clients Succeed Financially

Wells Fargo Investment Institute is home to more than 100 investment professionals focused on investment strategy, asset allocation, portfolio management, manager reviews, and alternative investments. Its mission is to deliver timely, actionable advice that can help investors achieve their financial goals.

For additional investment insights and timely market commentary, visit our website. For assistance with your investment planning or to discuss the points in this report, please talk to your investment professional.

All investing involve risks, including the possible loss of principal. There can be no assurance that any investment strategy, including active and passive strategies, will be successful and not incur loss. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors some of which may be unpredictable. Asset allocation, including strategic and tactical asset allocation, do not guarantee investment returns or eliminate risk of loss including in a declining market.

Each asset class has its own risk and return characteristics which should be evaluated carefully before making an investment decision. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political or regulatory development affecting the sector. This can result in greater price volatility.

Alternative investments, including hedge funds and private capital funds, are speculative and entail significant risks including those associated with potential lack of diversification, restrictions on transferring interests, no available secondary market, complex tax structures, delays in tax reporting, valuation of securities and pricing. They trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods with adverse consequences for the fund and the investor. An investment in these funds involve the risks inherent in an investment in securities and can include losses associated with speculative investment practices, including hedging and leveraging through derivatives, such as futures, options, swaps, short selling, investments in non-U.S. securities, “junk” bonds, and illiquid investments.

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII. Opinions represent GIS’ opinion as of the date of this report; are for general informational purposes only; and are not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation; an offer to participate in any investment; or a recommendation to buy, hold, or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services accounts with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions, or communications made with Wells Fargo Advisors.